Real Estate Investments for a Secure Future

Monthly Archives: April 2013

SOLANA BEACH, CA-In the world of environmentaldue-diligence reports, knowing what each report does, how much they cost, what’s necessary and what’s not is of vital importance. More than 1,700 people attended a webinar this week hosted by GlobeSt.com, titled, “Due Diligence 101–Third-Party Reports from A to Z,” in which locally based Partner Engineering and Science, Inc.’s Joe Derhake, president, and Jenny Redlin, principal, discussed these matters and more related to due-diligence reports.

To view the webinar on-demand through July 2, 2013, click here. (Note: While the webinar will be viewable in Firefox, the preferred browser in which to view this event is Internet Explorer.)

Derhake started out by stating that money does indeed matter in due diligence because “99% of our clients are stewards of other people’s money.” Underwriting model assets is a chief concern, and when you know the ropes of due-diligence reports, everybody makes money.

Redlin explained that environmental due diligence—while it sounds like “hippie tree-hugger” fodder—actually comes down to protecting your investment. “You need to understand and weigh the risks associated with that investment.” Knowing if there’s ever been a risk of hazardous materials released form the property or contamination associated with that property is important, and doing proper due diligence protects you from liability.

The most common use of environmental due diligence is the Phase I Environmental Site Assessment, of which the 1527-05 is the gold standard. Phase I ESAs include a site visit, searches for historical and government records, and other available information. In addition, the Phase I determines if surrounding properties impact the subject properties.

For those investors who don’t want to spend the money on a full Phase I ESA—which costs between $1,800 and $2,500—smaller transactions can be performed. A transaction screen, the most commonly used smaller transaction, consists of the same elements as a full Phase I ESA, but doesn’t include an exhaustive search. Also, pieces of the Phase I can be done a la carte at a fraction of the price, Redlin pointed out. These smaller reports “should only be used for business-decision processes. They do not protect from liability.”

Generally, Phase I ESAs take about three weeks to complete, but some of the information may not be readily available and can take many weeks to obtain. “Waiting for these records can be extremely important,” said Redlin.

Also, it’s important to give the consultant performing the due diligence as much information on the property as possible before the search. “Sometimes the ordering person doesn’t have many details on the property,” said Redlin. “We’ll work with you to determine what’s important.”

Additional items to the standard Phase I ESA include searches for lead-based paint, asbestos, radon, mold and Chinese drywall. These items are add-ons and cost extra, so you need to specify if you want them.

When you receive the results of your Phase I ESA, look for the statement “no further actions recommended,” or “NFA,” which is a great place to start if you only have 30 seconds to look at the report, said Redlin. “REC” or “recognized environmental condition” means the situation needs further investigation, and some investors walk away from the deal when they receive this result.

If you want to delve further, you can order a Phase II ESA, which takes between three and five weeks to process. Prices vary depending on what will be analyzed.

Derhake explained what other results mean in a due-diligence report. Recommendations may be made for immediate repairs, which covers all repairs the consultant thinks are necessary. Replacement reserves predict major capital expenditures, and the way this data is expressed changes according to asset class.

In ASTM PCA Scope work, a walk-through survey is done on the property. “We look for easily visible and readily accessible deficiencies,” said Derhake. “Some deficiencies are invisible or we can’t get to them for some reason.”

When considering a professional to do a site assessment, ask for one that has at least five years of experience, is a registered engineer or architect, and specify the extent of the inspection you want: 10% of the units or 100% of the units, for example. Also, make the engineer aware of any extras they might need, such as a ladder for roof access, or anything they should know such as if the building is dilapidated and the roof may not be safe on which to walk.

PCA work includes some general assessments, but may not include subspecialists such as a roof assessment that requires an infrared camera, an MEP engineer for an air-conditioning unit, or specialists in elevators, ADA compliance or façades. “We may bring these specialists in, which alters the price.”

Ordering the right report is key to saving money. For example, an ASTM PCA report runs between $2,000 and $3,000, while an Equity PCA, which has a SWAT-Team approach and is more custom, can cost between $5,000 and $50,000, says Derhake. ALTA land surveys can cost between $3,000 and $6,000, and that doesn’t include extras like underground utilizes, flood-zone issues, etc. A zoning report can cost between $600 and $800 and can cover issues such as whether or not a site is “under-parked” or doesn’t have enough handicap spots, whether signage is out of compliance, if there are unpermitted subdivisions of space, bootleg property uses, if accessory buildings encroach onto yard setback requirements, if the landscaping is inadequate, if the floor area ratio is greater than prescribed, or if there are issues with a threshold for a rebuild. Here’s where the capital source really matters, as is knowing what’s important for what to search.

“When things get complicated, it really helps if we have a relationship with our client,” said Derhake. “When things get hairy on that one-in-10 deal, we can give better advice and understand a client’s risk tolerance if we already have a relationship with them.”

There is no job security. You can’t rely on staying with the same company through retirement. Pension plans, when available, are woefully inadequate. Social security benefits won’t come close to covering your living expenses in retirement.

The only way to reach financial security is to plan for it now, regardless of your age. You have to define financial security in your own terms. Have you defined the amount of assets that you need for financial independence?

Financial security is that amount of assets that will give you a specific income, after taxes, to live like you want to, without having to depend on day-to-day employment.

What is that amount for you? I believe it is more than you think. And, I feel that if you define it, you can reach it in ten years or less. Do you have a financial plan and the assistance of a financial planner? You need both. Always retain a financial planner on a fee-for-service basis. Don’t mix financial planning with an investment broker or insurance agent. What are your financial goals and what is your time line? Because I started late in my quest for financial independence, I have a maximum five-year period remaining for capital accumulation.

Action Idea: Wealth is not only based on income, but also on expenditures. Are you spending or investing? Are your purchases goal-achieving or tension-relieving? How do you use credit cards? Use your credit cards for services or purchases that retain their value or that build your business. Don’t use credit cards for vacations and personal entertainment, unless you plan to pay the entire balance in one or two months. Try to pay all your balances in full monthly. In this way, you avoid the ridiculously high interest payments. Realize that paying minimum balances, at high interest rates, means that you are paying two or three times what the original purchase was worth.

Most importantly, save at least 6 to 10 percent of your take-home pay each month, by writing a check into a savings account or mutual fund for that amount, as if it were a utility bill or house payment. The secret of most self-made multi-millionaires is compound interest. If parents saved one dollar each day for their newborn infant, by going without a cup of Starbuck’s coffee, or a Big Mac, or a soft drink for that day, by the time the child reached age forty, he or she would have a million dollars cash. No lottery windfall. No brilliant investment strategy. Just compound interest, which Baron von Rothchild labeled “The Eighth Wonder of the World.”

Among folks who pay even the slightest bit of attention to what’s happening in local economies across the country, it’s not exactly breaking news that lots of jobs are being added in Texas. The Great Recession that so many spots nationally are still struggling to recover from was barely a blip on the radar screen across much of the Lone Star State, and job growth has been at or even above the past norms for quite a while.

What you might have missed unless you pay really close attention to the stats, however, is that early figures for job production in 2013 show the economies in Texas kicking into even higher gear and breaking further away from the pack.

That’s particularly true in Houston.

Sure, Houston is the country’s growth leader in terms of the absolute number of jobs created, as it has been for the past couple of years. The latest figure from theBureau of Labor Statistics places that number at 118,700 jobs on an annual basis. What’s changed is that Houston is now also in the #1 position for percentage expansion among the 100 largest markets in the U.S. The metro’s 4.5% growth rate is a truly phenomenal performance given the Houston area is more than three times the size of all but one other place registering growth of 3% or better.

No surprise, Dallas/Fort Worth is the big-market bridesmaid at this wedding, though the 3.7% job growth rate in North Texas really isn’t quite in the same category with Houston’s impressive showing.

Jobs translate to new household formation and apartment demand, right?

Thus, it’s no shock to see the two biggest job producers among the nation’s really large metros also at the top of the charts for apartment leasing during the year-ending 1st quarter. Despite adding fewer jobs than Houston, Dallas/Fort Worth actually garnered the most apartment demand – 11,194 units, compared to 8,044 units – mainly because D/FW operators worked especially hard in order to get a meaningfully bigger block of completions through initial lease-up. Dallas/Fort Worth registered additions totaling 8,443 units during the past year, versus the 5,626 units finished in Houston. The Houston crowd probably isn’t complaining about a little less demand compared to the D/FW tally, however, as they did notably better on rent growth – 3.8% in Houston, relative to 2.3% in Dallas/Fort Worth.

Over the next year or so, look for it to continue be a neck-and-neck race between Houston and Dallas/Fort Worth for the lead in apartment absorption nationally. Houston should continue to have the key advantage of a faster-growing economy, but D/FW will continue to add more new product completions that operators will be pushing hard to get through lease-up.

Washington, D.C.—This month Fannie Mae marks the 25th anniversary of its Delegated Underwriting and Servicing (DUS®) program, a unique risk-sharing model that provides financing to the multifamily housing market. Fannie Mae relies primarily on the DUS network of 24 financial institutions and independent mortgage lenders to execute its multifamily business. In 2012, 98 percent of the multifamily debt Fannie Mae acquired was delivered through the DUS platform. Since the program was formally announced to participating lenders on April 4, 1988, Fannie Mae and its lender partners have provided more than $270 billion in liquidity to the mortgage market under the DUS program to finance more than 5.8 million units of multifamily housing.

DUS lenders must abide by rigorous credit and underwriting criteria and submit to Fannie Mae’s ongoing credit review and monitoring. They can underwrite, close, and deliver loans on multifamily properties to Fannie Mae and typically retain one-third of the risk on every loan.

Borrowers also value the liquidity and flexible loan structuring that is available through the DUS program and its lender network.

New York—Should you use a submetering system in your community to generate revenue? In a recent webinar titled “Submetering to Increase Profits and Resident Satisfaction,” which was hosted by Multi-Housing News and sponsored by NWP Services Corporation, panelists Howard Behr of NWP, Cynthia Haines of WRH Realty Services and Michael May of Tehama Wireless provided best practice suggestions for implementing and maintaining water submetering systems in multifamily communities.

When considering implementing a submetering system, it is important to read up on the different types of meters, as well as the requirements in your state. “Almost all new construction installs submetering systems,” Behr said. “Submetering is required in many areas, which may limit the type of meters you can use.”

Additionally, according the Behr it is crucial to choose a manufacturer that is committed to working with multifamily communities. If not, the service will not be good and it will be difficult to get replacement parts.

In terms of the technology for the automatic meter reading (AMR), May suggested that property managers seek out devices that are non-proprietary so that they are open to a variety of different billing systems. He said that property managers should pick a meter that uses the current technology, because that will allow the AMR to be flexible and take on new abilities.

May also recommended choosing a meter that is easy to install and maintain. “This minimizes disruption to your residents,” he said.

Maintenance is critical for a successful submetering system. According to Behr, a common issue that comes up is the meter will stop sending a signal. To correct this, replace the battery, replace the transmitter and reposition the meter to avoid interference (from the residents or otherwise). Another issue could be that the meter is showing no usage. If this occurs, Behr suggested replacing the probe (wire), replacing the meter and reinstalling the meter.

“There’s not one fix,” Behr said of maintenance issues. “There’s not one easy answer.”

There are some challenges that might arise with a submetering program. According to Haines, there are different legal requirements in different states. The biggest challenge, however, could be complaints from the residents. If this occurs, Haines suggested reviewing the AMR—was this a one-time occurrence or a repeated event? Often times, a spike in the reading occurs when the resident has guests in the apartment, which leads to more water usage that month.

A way to minimize complaints is to put systems on a regular maintenance service program. “This also eliminates the approval process for unbudgeted repairs,” Haines said.

Property managers should also make sure the community staff is knowledgeable about the submetering system.

“It’s important to train staff so they can answer basic questions,” Behr said. This could eliminate some frustrations residents feel if issues arise and could help build their confidence in the system as a whole.

When submetering systems are added to communities, do the residents respond positively?

According to Haines, residents often consider a submetering system to be a benefit, as opposed to paying a monthly flat rate.

This is something I have been saying for quite some time now, Thank You Scott and Mark.

When it comes to American manufacturing the U.S. media seems a bit confused. Last year, a bunch of stories (example here) argued that manufacturing job losses over the last decade don’t matter because productivity looks so good. Now, stories like this one are suggesting that manufacturing itself doesn’t matter much after all because the sector isn’t creating enough jobs. The current argument in vogue maintains that job growth figures just haven’t been robust enough in manufacturing to warrant policies that support the sector.

What the authors miss is mass employment is not the fundamental reason we need a healthy and vibrant manufacturing sector. Manufacturing—or rather advanced manufacturing—is essential to the U.S. economy because it is the main source of innovation and global competitiveness for the United States. Simply put, advanced manufacturing is the U.S. pipeline for new products and productivity-enhancing processes. While the sector makes up just 11 percent of the economy, manufacturers conduct 68 percent of private sector R&D, asreported by our colleagues Sue Helper and Howard Wial last year. And on average, they noted, 22 percent of manufacturers introduce new processes to increase productivity compared to just 8 percent of non-manufacturers. This is important because innovation that emerges from America’s manufacturing sector also fuels growth within the service sector because intermediary goods—the machines used by services (e.g. automated self check-out kiosks at grocery stores)—drive service sector productivity.

Some ask, meanwhile, why the nation should not simply import the advanced machinery needed for service-sector productivity. The problem with this argument is that services are, and will remain, largely non-traded. Regardless of how productive services become, the sector’s growth will be tethered to domestic demand. No amount of efficiency will allow a domestic grocery store to service international consumers. If the U.S. economy becomes one in which the U.S. imports all of the machinery that makes the service sector productive and no longer export any products of our own then inevitably we will consume more than we produce and incomes in services and manufacturing will decline. This is overwhelmingly clear in recent trade statistics. In 2012 manufacturing represented roughly 60 percent of U.S. exports despite only being 11 percent of the economy. By punching far about its weight class in exports the manufacturing sector is vital to U.S. global competitiveness.

In sum, the number of jobs within manufacturing is important, but taken by themselves employment figures miss the real reason manufacturing is an American imperative. U.S. quality of life, the ultimate benchmark of the direction of the economy, is contingent upon the competiveness of our traded sector and the speed at which innovative products and processes reach the market. On both metrics manufacturing is essential.

Apartment vacancies nationwide continued to shrink in the first quarter of 2013, according to a report by Reis Inc. released on Wednesday. Vacancies fell by 20 basis points during the first quarter of 2013, dipping to 4.3 percent. Over the last four quarters, national vacancies have declined by 70 basis points, a much faster pace than any other CRE sector.

Reis notes that apartment vacancies have now fallen by 370 basis points since the cyclical peak of 8 percent, which was recorded back in late 2009. By contrast, office market vacancies have only fallen by a miserly 60 basis points since fundamentals began recovering five quarters ago.

The apartment sector absorbed a net of over 36,000 units in the first quarter. However, Reis adds, apartment owners only have another quarter or two of tight supply before a large raft of new properties come online — some 100,000 units will be added to the market nationwide this year, mostly in the second half of the year.

Home Prices Increasing Briskly, Especially in California

CoreLogic said on Wednesday that home prices nationwide, including distressed sales, increased 10.2 percent in February 2013 compared to February 2012. That’s the largest year-over-year increase since March 2006. On a month-over-month basis, including distressed sales, home prices were up 0.5 percent in February 2013.

Take distressed sales out of the equation, and U.S. home prices increased year over year at nearly the same rate: 10.1 percent in February 2013. Month over month, the increase was 1.5 percent in February. In CoreLogic’s calculations, distressed sales include both short sales and REO transactions.

“The rebound in prices is heavily driven by western states,” Mark Fleming, chief economist for CoreLogic, said in a statement. “Eight of the top ten highest appreciating large markets are in California, with Phoenix and Las Vegas rounding out the list.”

ADP Reports Middling Jobs Growth

Ahead of the official employment numbers on Friday, Automated Data Processing made its usual monthly report on private hiring, finding that 158,000 private-sector jobs were created in March. That compares unfavorably to last month’s revised report, which found that 237,000 private-sector jobs were created.

Also on Wednesday, the Institute for Supply Management reported that its Non-Manufacturing Index came in at 54.4 percent in March, 1.6 percentage points lower than in February. The drop indicates continued growth at a slightly slower rate in the non-manufacturing sector.

Wall Street dropped on Wednesday, perhaps in response to the relatively weak numbers of the day. The Dow Jones Industrial Average lost 111.66 points, or 0.76 percent, while the S&P 500 and the Nasdaq declined 1.05 percent and 1.11 percent, respectively.

The appeal of renting versus owning a home is changing across the country, according to a new study commissioned by the MacArthur Foundation.

On the heels of the housing crisis, 54 percent of survey respondents say renting a home has become more appealing. By nearly the same percentage, 57 percent, respondents believe that buying has become less appealing.

Even though there are positive signs that the housing market has rebounded, the public clearly remains nervous. In fact, 77 percent believe the nation is still in the midst of the housing crisis or the worst is still to come.

The study by Hart Research Associates examines how American attitudes have been transformed by the housing market collapse and changing lifestyles.

Even as attitudes shift, more than seven out of 10 people still aspire to own their own home.

In the past, homeownership and renting were seen more as a zero-sum game, says Rebecca Naser, senior vice president at Hart Research.

“It’s a new way of looking at housing in general,” she says. “You can still aspire to own a home but still see renting in your future.”

In another finding, the study reveals that the public favors a balanced housing policy. Sixty-five percent believe that housing policy should be equally split on ensuring people have access to rental housing and houses to own.

“It is stunning to see how Americans are beginning to favor a new balance that serves both the homeownership and rental markets,” says Peter Hart, chairman emeritus of Hart Research. “The emergence of this more balanced view that government support for rental housing and homeownership should be equalized is both surprising and significant. The How Housing Matters survey underscores that it’s no longer renters versus owners, the haves versus the have-nots, or the young versus the old. There is a new and real acceptance of a more balanced approach to housing policy that puts renting and owning on a more equal footing.”

Other findings of the survey include:

45 percent of respondents have experienced a time when their housing situation was insecure or unstable;

45 percent of current owners can see themselves renting at some point in the future; and

Roughly seven in 10 believe that government policies “ensuring that more people have decent, stable housing that they can afford” leads to a major positive impact on the safety and economic well-being of neighborhoods, children’s ability to do well in school, and family financial security.

College basketball fans turn their attention each spring to March Madness, otherwise known as the NCAA Tournament. It’s a hoop-junkie’s dream come true – four weeks of “win-or-go-home” basketball featuring the best teams in the land. But what if they didn’t keep score? What if they just played for fun? It doesn’t work that way in athletics, and it seldom works that way in the professional world. We set goals, we measure results and, ultimately, we win or go home depending upon how well we do against the competition.

So when we’re making key decisions as leaders, it can seem counter-intuitive to filter outcomes with the question that I’m going to recommend: Is this mutually beneficial? I love competition, but every deal shouldn’t end with an “I won, you lost” outcome. In fact, I’m convinced that it’s possible – and profitable – to consistently make mutually beneficial decisions with the people and organizations that work with and around us.

Here’s why it’s worth the effort:

1. It adds value to others.
This is a personal value of mine and a value of the organizations that I lead. It requires that we start every day and every discussion and every decision-making process with objective of helping others improve. All too often, people go into a meeting or a negotiation asking, “What can I get from them? What’s in it for me? How can I sneak something by them?” Wouldn’t it be terrible to spend day after day driven by the tactics of manipulation? When you’re done, you can say, “I won and you lost.” But then what? You go back to life. You’ve got to go back to why we’re here. And we are our brothers’ keepers. That’s what we’re here to do. And to lighten someone else’s load is a very noble cause.

2. It compounds influence, effectiveness and results.
When you come to the table with the attitude of helping and serving others, you immediately compound the influence, effectiveness and results of everyone involved, whether it’s two people, a group of people or multiple organizations. We experienced this not long ago when working with the Christian Broadcasting Network. I was representing EQUIP, our non-profit ministry, at a meeting with the leaders of CBN. Because we went into the meetings looking to make mutually beneficial decisions and not just bottom line issues like funding, we discovered ways to make each other better. They needed training for their leaders, which I unconditionally agreed to provide. And their equipment, technology and experience will help us lower production costs for things like DVD’s that we use for the ministry.

3. It strengthens relationships.
You’ve probably heard the expression; “It’s lonely at the top.” Well, I want to go to the top, but I have no desire to go alone. If you’re alone at the top, you’re probably not a leader, anyway. Who are you leading other than yourself? Leaders take people on the journey with them. They help take others to the top.

When you have the heart and desire to add value to people and you long as a leader to pour into other people’s lives first, then you begin to add value to them and you begin to lift them to a higher level. The benefits are compounded and relationships are strengthened. When that happens, the score really doesn’t matter. Everybody wins.

The top-tier assets are seeing a slowdown in rent growth, while a trickle-down effect has given Class C assets a big boost.

Rent growth for Class C properties is increasing nationally at an average of 4.3 percent, while Class A rents grew 3.2 percent, down from 4.9 percent a year ago, a new Axiometrics report shows.

And the top-tier metros are starting to slow as well. Boston and San Francisco rent growth rates are both below the national average after consistently ranking in the top tier for the last two years.

Boston’s rent growth rate decreased during the first quarter of 2013 falling to 2.9 percent this February, down from 15.9 percent a year ago. In San Francisco, the biggest decline occurred in Class A properties, with rents 2.5 percent lower this year compared to last year. But Class C assets in San Francisco are seeing the opposite: their revenue growth rates increased 12.1 percent.

Rent growth across all metros and asset types remained steady in February at about 3.5 percent, the lowest rate since August 2010.

Nationally, occupancy is strong at 94 percent, up 35 basis points from last year, and is expected to increase to 94.9 percent by the end of the year.